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Order 636 Principles Needed in Power Market

Order 636 Principles Needed in Power Market

A principle that was the cornerstone of FERC's landmark gas restructuring rule, Order 636, is absent from Order 888 and is at the root of many of the reliability problems in the bulk power market, say industrial power customers and a utility/marketer.

The Commission recognized "so astutely" in Order 636 that comparability of service and pricing for similarly-situated customers was the "linchpin for overcoming both competitive and reliability challenges" in the natural gas industry, said affiliates Dynegy Power Marketing, Dynegy Power Corp. and Illinois Power Co. That "piece of the puzzle," however, is missing from the wholesale power market.

Order 636, which came out in 1992, "engineered.....a comprehensive retooling of the natural gas market," giving customers access to sufficient supplies of gas at reasonable prices, the Dynegy affiliates said; but that wasn't so in Order 888. FERC "cannot postpone any longer the implementation (or at least a fuller discussion)" of initiatives to assure similar access and sensible prices for electric customers, they noted.

Likewise, the Electricity Consumers Resource Council (ELCON), the American Iron and Steel Institute and the American Chemistry Council (Industrial Consumers) believe FERC "should go beyond mere behavioral rules for checking the discriminatory conduct of transmission owners by adopting the electricity equivalent of Order 636..."

Specifically, the Commission should "respond affirmatively" to a March 1998 filing in which petitioners proposed that FERC "divorce" regulated transmission owners from their affiliated merchant operations, forcing the merchant facilities to "seek and obtain transportation pursuant to identical rules.....that govern all other shippers," the Industrial Consumers said.

Imposing this Order 636-like strategy in the electric industry "is even more essential because the degree of vertical integration of the incumbent utilities makes the incentive and opportunity to discriminate much greater than it was in the less-integrated natural gas industry," the group noted. "FERC must undo many of the consequences of 65 years of regulation for real competition to emerge" in the wholesale power market.

The Dynegy and ELCON comments were in response to the Commission's two-part request in May for industry suggestions on short- and long-term initiatives for enhancing the reliability of the power grid. Industry filed comments at FERC on ways to improve reliability in the short term in early June, while the deadline for proposals addressing long-term reliability was a week ago [EL00-75].

Dynegy and ELCON cautioned the Commission against looking to regional transmission organizations (RTOs) as a cure-all for reliability problems. RTOs "are not the panacea to the industry's ills.....[E]ven if the Commission mandated RTO formation, it would still fall well short of addressing the market disparities and the fundamental inequities resulting from the lack of comparable access to transmission service for all market participants," the Dynegy affiliates noted. For instance, they said RTOs would do little to stop transmission owners from hiding their "discriminatory behavior behind the cloak of native load."

FERC's prior policy on independent system operators (ISOs) and its voluntary rule on RTOs are failing, contends ELCON. "Reliability problems (and irrational pricing conditions) are just as (if not more) endemic of existing ISOs than regions that are not served by ISOs."

In a white paper filed at FERC, the Electric Power Supply Association (EPSA) cautioned the Commission against letting RTOs actively involve themselves in competing generation markets, saying this could further jeopardize the "reliability and stability" of the markets in the long term. RTOs should stick to operating transmission systems in a reliable, non-discriminatory manner, the group said.

Unfortunately, however, nearly all of the existing ISOs - the California ISO, the PJM Interconnection, the New England ISO and the New York ISO - "have shown that they are inclined to take on a significant role in power markets, which can preempt private market development," the group of energy suppliers noted. Their intervention is mostly seen in the form of price caps on generation, EPSA said.

Every operational ISO has invoked price caps this summer. "Price caps mute price signals that would generate capital to build generation. Indeed, the mere rumor that the Commission was considering national price caps for generation a few weeks ago caused an almost $8 billion exodus in capital from generator stocks in two days," the Dynegy affiliates noted. Dynegy stock was among those affected by the rumor.

While FERC has given industry "some guidance" on the issues influencing reliability, "some of it is dated, some of it is sketchy, and some of it is unclear and subject to misinterpretation," the Dynegy affiliates said. "Fortunately, however, serious (and surprisingly candid and progressive) discussion on these issues is taking place as market participants meet to decide their RTOs. Indeed, momentum is growing in some parts of the industry to move decidedly away from contract path, after-the-fact pricing [for transmission] and to a model where power can be bought and sold in a forward market through the use of hedging tools that provide price certainty. These discussions are occurring largely without the benefit of Commission participation."

Susan Parker

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